How A Divorce Can Boost Health Insurance Subsidies

As the enrollment period continues for health coverage on the state health insurance marketplaces, people continue to have many questions about buying a plan there.

What happens with premium tax credits if a couple gets divorced? If the premium tax credit is based on the previous year's income when the couple filed taxes jointly, many wouldn't qualify. But once someone is divorced, one individual might have little income. What is the subsidy based on in that situation?

If a couple divorces, each person's eligibility for premium tax credits will generally be based on his or her own annual income. The former spouse's income won't be counted, even if the couple filed taxes jointly the previous year.

Premium tax credits are available to people with incomes up to 400 percent of the 2013 federal poverty level ($45,960 for an individual).

During the application process, people are asked to project their income for the year. If someone estimates income that's more than 10 percent lower than the previous year's taxes or wage information or Social Security data would suggest, the system will flag it.

At tax time next year, the Internal Revenue Service will reconcile an individual or family's actual income against the amount that was projected. People who received too much in tax credits may have to repay some or all of it.

The situation may be different for couples that are separated but not yet divorced, however. If each files taxes as "married filing separately" neither will be eligible for premium tax credits on the exchange.

We live in Texas because my husband is going to college. But our home is in Arkansas and we aren't changing our driver's licenses to Texas because we're going back to Arkansas after he graduates. Should we apply for insurance in Texas or Arkansas?

Since you're living in Texas, you'll probably have better access to the local medical care you need if you buy a plan on the Texas exchange. In addition, a number of state exchanges offer multi-state plans with national networks of doctors and hospitals. That may be an option if you want access to providers in both states.

To be eligible for coverage on a state marketplace, you have to be a resident there. But marketplaces are generally being pretty lenient about requiring proof.

An exchange may ask you for documentation that your husband is enrolled at the college or for an apartment lease, says Stephen Beckley, a consultant on student health care.

I live in a state that has not expanded its Medicaid program under the health law. I am concerned that if I get a premium tax credit (because I expect that my income will be somewhere within the 100 to 400 percent of poverty range) and it turns out that I have an income of less than 100 percent of poverty, I will be stuck paying back a very large subsidy! Is there any leeway in the law so that I would not have to pay this back?

The law protects people in your situation. As you note, the health law limits eligibility for premium tax credits to people with incomes between 100 and 400 percent of the 2013 federal poverty level ($11,490 to $45,960 for an individual).

The health law originally expanded Medicaid coverage to adults with incomes up to 138 percent of the federal poverty level, so it was thought that people with incomes below the poverty level wouldn't need access to premium tax credits. Therefore subsidies were limited to people earning from 100 to 400 percent of poverty. But those provisions were challenged in court, and, in 2012, the Supreme Court ruled that the Medicaid expansion was optional for states. So far, 25 states and the District of Columbia have expanded coverage.

However, a Treasury Department special rule addresses the potential financial repercussions for people like you. The rule says that if your state exchange determines that you're eligible for a tax credit, but your actual income at year end puts you below the poverty level, you won't have to repay any tax credit amounts that you received.

"In this situation by definition the annual income is less than the original estimate, so there won't be any obligation to repay [the premium tax credit]," Judith Solomon, a vice president for health policy at the Center on Budget and Policy Priorities, said in an email.